Bullish bets on Asian FX hit multi-year highs as 2021 outlook brightens

Bullish bets on trade-sensitive Asian currencies rose to multi-year highs, a Reuters poll showed, as improving exports and expectations of higher capital inflows buoyed hopes that the region may lead a vaccine-driven economic recovery in 2021.

Long positions on the Chinese yuan, seen as the anchor for other currencies in the region due to strong trade ties, stood at their highest level since January 2014, the fortnightly poll of 14 respondents showed.

Bullish bets on the South Korean won were near an eight-year high, while those on the Taiwan dollar jumped to their highest since early October 2009. Long views on the Singapore dollar hovered near a three-year high.

Asian currencies face a "winning trifecta" going into 2021, said ANZ analysts, noting expected smoother vaccine rollouts in the region due to relatively better virus containment, and a likely rise in exports and portfolio inflows.

For the yuan, in particular, improving external balance, strong portfolio inflows, wide interest rate differentials and prospects that the People's Bank of China could be the first central bank to exit unconventional easing will all help in 2021, they wrote.

"We still see the yuan as undervalued, and Chinese authorities have been comfortable in allowing the currency to appreciate. We forecast CNY to reach 6.30 by the end of 2021," they said.

The yuan has held steady recently despite a spike in Sino-US tensions, after the United States blacklisted two major Chinese companies and imposed sanctions on at least a dozen Chinese officials, prompting Beijing to say it would retaliate.

"For the time being, markets may be focusing on COVID-19 vaccine prospects as well as US fiscal stimulus hopes. So, US-China tensions may come back into play as the Joe Biden administration gets going," said Daniel Dubrovsky, an analyst at DailyFX.

Long bets on the Thai currency rose to their highest since January but were at relatively lower levels compared to other export-sensitive currencies, as political tensions and growing central bank discomfort over the baht's appreciation weighed.

The Bank of Thailand (BOT) on Wednesday said it stepped in to slow volatility in the baht so that it would not derail economic recovery, after the currency strengthened to a one-year high of 29 baht per US dollar.

"Theoretically, the Bank of Thailand could have infinite room to weaken its currency if it continues to accumulate foreign exchange reserves," said DailyFX's Dubrovsky, pointing out that reserves clocked in just shy of an all-time high in November-end at $254 billion.

"The risk for the BOT is to balance its efforts, as sudden announcements or aggressive intervention could scare away investors and induce capital flight... it will be pertinent to keep a close eye on their efforts."